I am trying to share my personal experinece on the China Domestic Distribution products. This is not a statement but a document that invites comments and suggestions , maintaining an ibjective of sharing knowledge with the industry and interested parties.
By Chaminda Gunasekera (www.globallogisticsmedia.com)
International forwarder's approach to the China domestic market.
In the past decade, the China domestic market has been receptive to the international companies trying to offer distribution services . The market started to open up with the WTO agreement offering some flexibility for International companies to set up the distribution capabilities. Most international forwarding companies planned to buy a local company in the market but it was not an easy task as there are a very few local trucking companies who have a china-wide capability. Most local companies are very strong only in one or two regions . The other foreign companies who did not have the funds to buy local Chinese companies decided to work with the sub contractors. None of both options have proven to be successful so far. MNC forwarders have run in to many issues with m&a or managing sub contractors. This is mainly due to lack of understanding of the local market and its practices and inability to adopt to the local practices by MNC forwarders.
Behavior of local companies in domestic distribution (B2B)
As we all know China is a very complicated subject and its becoming less complexed with the government wanting to streamline the local logistics . China wants to be on par with other developed countries in terms of local distribution but probably China is at least 10 years behind EU or US . The behavior of local trucking companies have made things difficult for foreign companies to compete with them. There are few reasons to this .
First of all the cost base of the local companies are lower due to ways and means of their cost control measures. For an example , when a Foreign company do repair and maintain a truck every 10,000 kms , a local company would ask the driver of the truck to change the engine oil and main the basics repairs. Moreover replace tires with re-built tires which are much less expensive than buying new tires. This is only an example. Secondly , the local companies look at ROI on a long term basis and they are not worried to invest in a business and a relationship to start the business. The Foreign companies would look at it in a different way. MNC companies anticipate a quicker ROI and make it further difficult by adding layers of management .
Thirdly , the local companies have developed very strong communication channels with most trucking companies who work for each other as sub contractors . This way the local companies are managing the cost and utilization of their trucks better. However the type of trucking they do , do no suit the internationally branded manufactures or distributors of finished goods in China.One of the other reasons for local trucking companies to be very successful is their business development strategy. If a local company targets a customer , they will spend a very long time to understand the real decision maker and build a good relationship before they start the business. This way there are various advantages that a local company could get from such relationships. This is also seen as a grey area in the trucking intrustry.Few players in the trucking world have adopted unprofessional practices such as transporting special material with out proper licenses to carry them or avoiding toll charges to keep the cost low , however these are not seen as major trends of local company behaviors .
Which customers are looking for International forwarders and why?
Focus on China manufacturing and domestic demand is growing as we speak. The attention on the China domestic market is increasingly growing particularly with international companies who are supplying products to the Chinese domestic consumption. With the growth of domestic demand ,there are a few changes happening with how a company(cusotmer) could control their suppliers .
First of all many foreign companies (end customer) who have established themselves in China ,want control of the Chinese business and its suppliers (trucking ) due to various reasons. Most common reasons are malpractice in awarding and managing trucking suppliers, containing cost, gaining visibility of their products through the domestic supply chain and meeting end customer's KPIs or requirements for on-time deliveries. Many foreign companies(customer) would also like to create a unique selling proposition by offering predictable domestic supply chain to their customers,which is a bit rare in the general market place.
In many cases, the companies who do domestic distribution with local trucking companies will find that load optimization and cost are not managed well. And it will not have much transparency. Due to lack of system visibility and proper planning, point to point trucking increases the cost of domestic distribution. This is also sometimes done intentionally for commercial benefits for the supplier and the person who manages trucking suppliers.
International companies(cusotmers/Brands) who are coming to China need to conform to certain regulations like FCPA and Sarbens-Oxley. They need to have a very transparent and fair business practices even for domestic distribution. This will drive the behavior of companies to look for foreign forwarders and supply chain companies to set up China distribution services.
How international forwarders can approach China Domestic Business.
If we talk about the future of China domestic trucking and distribution, it is not practical to rule out the existence and future involvement of local trucking companies. However if we focus on a certain segment of the market where international brands are looking for B2B type domestic distribution, will offer enough opportunities to foreign supply chain companies to compete in China and to grab a portion of the distribution business. Before we discuss the suggestions, I do believe every company who enter this domain should be very focused on the type of industries that they could be competitive.
Understanding the buying influence: Most branded companies will set up centralized purchasing and corporate logistics teams to control the logistics bidding and cost . In this scenario , the factory based logistics managers (former decision makers) will not have control over decision on cost but they will team up to qualify the service providers bidding for the business. Its very important to understand the role that corporate logistics teams and factory based logistics managers are playing and how they influence the final award. Most foreign supply chain service providers interested in domestic business focus on the corporte logistics teams only. However the real user of the service is factory based logistics managers and they will also influence the KPI performance.
Supplier management : Most foreign supply chain companies who are getting into the China Domestic market will not have full coverage of China with second and third tier cities. Many companies will be strong in one or two major provinces and will offer short haul deliveries to B2B type requests. To cover the second and third tier cities and also offer a full coverage , these foreign companies will have to work with the local heroes in each region. The most important factor of managing a supplier base is to understand the cost structure and how to get better LTL rates. The most prudent way of doing that is to invest in a person who has deep knowledge of a local trucking operation to manager the suppliers.
ROI: most Chinese local trucking companies are cost effective than foreign companies in China. The reasons are many but the most significant factor of competitiveness by local trucking companies is their mindset on return on investment. The local companies do not have a high management or operational cost structure
By Chaminda Gunasekera (www.globallogisticsmedia.com)
International forwarder's approach to the China domestic market.
In the past decade, the China domestic market has been receptive to the international companies trying to offer distribution services . The market started to open up with the WTO agreement offering some flexibility for International companies to set up the distribution capabilities. Most international forwarding companies planned to buy a local company in the market but it was not an easy task as there are a very few local trucking companies who have a china-wide capability. Most local companies are very strong only in one or two regions . The other foreign companies who did not have the funds to buy local Chinese companies decided to work with the sub contractors. None of both options have proven to be successful so far. MNC forwarders have run in to many issues with m&a or managing sub contractors. This is mainly due to lack of understanding of the local market and its practices and inability to adopt to the local practices by MNC forwarders.
Behavior of local companies in domestic distribution (B2B)
As we all know China is a very complicated subject and its becoming less complexed with the government wanting to streamline the local logistics . China wants to be on par with other developed countries in terms of local distribution but probably China is at least 10 years behind EU or US . The behavior of local trucking companies have made things difficult for foreign companies to compete with them. There are few reasons to this .
First of all the cost base of the local companies are lower due to ways and means of their cost control measures. For an example , when a Foreign company do repair and maintain a truck every 10,000 kms , a local company would ask the driver of the truck to change the engine oil and main the basics repairs. Moreover replace tires with re-built tires which are much less expensive than buying new tires. This is only an example. Secondly , the local companies look at ROI on a long term basis and they are not worried to invest in a business and a relationship to start the business. The Foreign companies would look at it in a different way. MNC companies anticipate a quicker ROI and make it further difficult by adding layers of management .
Thirdly , the local companies have developed very strong communication channels with most trucking companies who work for each other as sub contractors . This way the local companies are managing the cost and utilization of their trucks better. However the type of trucking they do , do no suit the internationally branded manufactures or distributors of finished goods in China.One of the other reasons for local trucking companies to be very successful is their business development strategy. If a local company targets a customer , they will spend a very long time to understand the real decision maker and build a good relationship before they start the business. This way there are various advantages that a local company could get from such relationships. This is also seen as a grey area in the trucking intrustry.Few players in the trucking world have adopted unprofessional practices such as transporting special material with out proper licenses to carry them or avoiding toll charges to keep the cost low , however these are not seen as major trends of local company behaviors .
Which customers are looking for International forwarders and why?
Focus on China manufacturing and domestic demand is growing as we speak. The attention on the China domestic market is increasingly growing particularly with international companies who are supplying products to the Chinese domestic consumption. With the growth of domestic demand ,there are a few changes happening with how a company(cusotmer) could control their suppliers .
First of all many foreign companies (end customer) who have established themselves in China ,want control of the Chinese business and its suppliers (trucking ) due to various reasons. Most common reasons are malpractice in awarding and managing trucking suppliers, containing cost, gaining visibility of their products through the domestic supply chain and meeting end customer's KPIs or requirements for on-time deliveries. Many foreign companies(customer) would also like to create a unique selling proposition by offering predictable domestic supply chain to their customers,which is a bit rare in the general market place.
In many cases, the companies who do domestic distribution with local trucking companies will find that load optimization and cost are not managed well. And it will not have much transparency. Due to lack of system visibility and proper planning, point to point trucking increases the cost of domestic distribution. This is also sometimes done intentionally for commercial benefits for the supplier and the person who manages trucking suppliers.
International companies(cusotmers/Brands) who are coming to China need to conform to certain regulations like FCPA and Sarbens-Oxley. They need to have a very transparent and fair business practices even for domestic distribution. This will drive the behavior of companies to look for foreign forwarders and supply chain companies to set up China distribution services.
How international forwarders can approach China Domestic Business.
If we talk about the future of China domestic trucking and distribution, it is not practical to rule out the existence and future involvement of local trucking companies. However if we focus on a certain segment of the market where international brands are looking for B2B type domestic distribution, will offer enough opportunities to foreign supply chain companies to compete in China and to grab a portion of the distribution business. Before we discuss the suggestions, I do believe every company who enter this domain should be very focused on the type of industries that they could be competitive.
Understanding the buying influence: Most branded companies will set up centralized purchasing and corporate logistics teams to control the logistics bidding and cost . In this scenario , the factory based logistics managers (former decision makers) will not have control over decision on cost but they will team up to qualify the service providers bidding for the business. Its very important to understand the role that corporate logistics teams and factory based logistics managers are playing and how they influence the final award. Most foreign supply chain service providers interested in domestic business focus on the corporte logistics teams only. However the real user of the service is factory based logistics managers and they will also influence the KPI performance.
Supplier management : Most foreign supply chain companies who are getting into the China Domestic market will not have full coverage of China with second and third tier cities. Many companies will be strong in one or two major provinces and will offer short haul deliveries to B2B type requests. To cover the second and third tier cities and also offer a full coverage , these foreign companies will have to work with the local heroes in each region. The most important factor of managing a supplier base is to understand the cost structure and how to get better LTL rates. The most prudent way of doing that is to invest in a person who has deep knowledge of a local trucking operation to manager the suppliers.
ROI: most Chinese local trucking companies are cost effective than foreign companies in China. The reasons are many but the most significant factor of competitiveness by local trucking companies is their mindset on return on investment. The local companies do not have a high management or operational cost structure
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